There has been considerable debate about how Blockchain and the tokenisation of property will unlock billions of Yen, £, €, CHF etc and enable people from across the globe to invest into property. For a number of years the likes of Deloitte has been purporting how “tokenization will fundamentally change the investment world. And those who aren’t prepared risk being left behind.” However, what the proponents of the digitisation of real estate tend to ignore are Real Estate Investment Trusts (REITS), as the last thing a firm looking to issue tokens wishes to draw prospective investors to is that their tokens will trade at a discount to net asset value.
The laws that originally established REITS were created in the US at the 14th September 1960 Congress and have now since been copied in 35 other countries. In the US REITS are valued at $3trillion and, in 2019, distributed $69billion of income to 87 million investors.
Average discount to NAV for US REITS
Source: S&P Global Market Intelligence June 2020
Therefore, faced with these statistics, how else can Blockchain be used in the real estate sector since fractional ownership (i.e. enabling smaller investors to get access to this illiquid asset) has apparently been already widely addressed? The Foundation for International Blockchain and Real Estate Expertise (FIBREE), originally established in Holland and now with members in 30 countries, has released its second global industry report -"Blockchain Real Estate". In this report, Jan Veuger, Professor at Saxion University in Holland believes, “Blockchain is the cement between artificial intelligence and the Internet of Things [IoT]. Convergence will play a major role in the field of information and communication technology. Different technologies and market players will converge and intertwine. I see that happening between blockchain, artificial intelligence and IoT.” Certainly a good example of this can be seen in Beijing’s newest airport which connects 5G technology with AI, Blockchain and IoT. The Blockchain technology is seen as a ‘skeleton’ from which other technologies can be connected.
The FIBREE report has also identified issues such as climate change and lack of trust are essentially the challenges facing the world. It accredits Blockchain as being the ideal technology within real estate to help monitor, effectively and inexpensively, both an individual building as well as the carbon footprint of different jurisdictions. Actions taken to help minimise the impact of climate change can be verified, recorded and monitored against those targets which have been set to achieve agreed environmental goals. FIBREE has identified that the use of Blockchain technology can be applied in the following ways:
smart contract energy deployment;
smoother international climate finance transfers;
fraud-free emissions management;
better green finance law enforcement.
The use of Blockchain-powered technology and smart contract deployment enable recording, tracking, management and sharing solutions across a wide area of energy markets and climate change-related activities. It also offers the possibility of creating permanent records and an audit of transactions for any individual property giving reliable and secure data. Subsequentially, a unique property ID for a building can be created thus offering the ability for an investor to monitor the ‘green credentials of the property’ as well as helping local authorities and governments to build a clearer picture of the environmental impact of the real estate in their environs. Insurance premiums could be lowered while, at the same time, potentially increasing the value of individual properties. Equally importantly, ‘eco-friendly’ and sustainable real estate is likely to attract a premium going forward.
Global real estate projects offering tokenised access
Indeed, Florian Huber, Co-Chair of FIBREE in Vienna, has identified that the majority of real estate tokenisation projects have less than €200,000 of capital, so they could hardly be described as offerings from institutional asset managers. Back in 2018, research undertaken
by Huber discovered that over 500 real estate tokenisation projects had been started across the world, yet less than half to date are still proceeding.
Whilst there has been considerable attention focused on the tokenisation of real estate (as the above table demonstrates) to date there has been more ‘hype’ than reality. Indeed, participants may well be approaching the use of Blockchain technology. Rather than creating a digital version of a REIT perhaps the focus needs to be on solving some of the discernible challenges regarding ‘on boarding’ e.g. client identification/AML (both initially and on-going), manging and reporting to investors and the risk analysis reporting requirements dealt with by the real estate managers . Compliance and regulation are ponderous and unceasing but Blockchain-powered platforms can automate much of the administrative burden, bring greater transparency and trust for all parties involved and remove/automate many of the existing paper-based analogue systems currently being used. By solving real, tangible challenges for an asset class which is worth over $9.6trillion globally, even small improvements in the efficiency of managing real estate can undoubtedly lead to substantial savings.